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Cost headwinds impact margin outlook

JK Cement 1QFY23 results came in line with our estimates. Net sales came in at INR21.2bn; +33% YoY, in line with JMFe, as growth was led by 18% increase in volumes to 3.56MT (in line with JMFe), while blended realisation grew by 13%YoY to INR6,084/t (flat vs JMFe). EBITDA remained flat YoY at INR4bn, and came in line with JMFe, as EBITDA margins contracted by 600bps YoY to 18.5%. Total operating costs increased by INR876/ton, but were compensated by an increase in realisations (increase of INR677/ton to INR6,084/t), resulting in blended EBITDA of INR1,124/t, down 15% YoY. Going forward, management expects continued cost pressures over the next quarter, but indicated that it would peak out. Fuel mix is around 50% pet coke, while balance is imported coal and alternate fuel. JK Cement’s next leg of expansion at Panna (4MTPA across MP and UP with 2.6MTPA clinker) will drive the growth for the company in medium term. The company has conveyed annual capex plan for INR17bn of which INR11.5bn would be for Panna, and INR1.5bn for the paint business and INR3bn for sustenance capex and balance expenditure for future plan (two split grinding units). We continue to maintain BUY on the stock valuing it at 12x EBITDA to arrive at TP of INR 2,800 (Mar’23).

* Healthy volumes and realisation drive growth: Net sales were up 33% YoY to INR21.2bn, where revenue from grey cement increased by 28% YoY to INR16.5bn supported by volume growth of 15% YoY to 3.17mT and realisation growth of 11% YoY to INR5,191/t. Revenue growth in white cement was 53% YoY to INR4.8bn supported by volume increase of 48% to 0.39MT and realisation increase of 4% YoY to INR12,230/t. Overall costs reported a rise of INR 876/t YoY. The rise in costs was led by direct costs, which grew by INR 657/t, owing to higher fuel prices. Direct costs were partially offset by increase in realisations (increase of INR677/ton to INR6,084/t) and operating leverage benefits realised during the quarter. EBITDA came in at INR4bn, flat YoY) while margins came in at 18.5% (-600bps YoY; JMFe: 18.6%). Blended EBITDA/ton declined by 15% YoY to INR1,124/t.

* Cost headwinds to impact margin outlook: Overall, costs have continued their unabated rise in 1QFY23 and 2QFY23. Management estimates an impact of INR 200/t in 2Q, owing to high cost inventory procured earlier. Further, inability of the sector to pass on the cost increase has impacted the margin outlook for the sector.

* Foray in paints a necessity for survival of white cement business: JK Cement has announced its foray into the paints business. The company will invest INR 6bn on the business over 5 years, split into two parts – INR 3bn on capacity building (60,000 kl/annum) and INR 3bn on branding, working capital and accumulated losses for initial years.

* Maintain BUY with a TP of INR 2,800: We have largely maintained our estimates for JK Cement owing primarily to their exposure to North (relatively well place to pass on cost increases). We maintain BUY valuing the stock at 12x FY24 EBITDA to arrive at a TP of INR 2,800

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